The Economics of social security

Social security is a vital safety net program that provides financial support to people unable to work due to age, disability, or other factors. It is a complex system that involves both government spending and individual contributions. The economics of social security are essential to understand to evaluate the program’s sustainability and impact on society.

One of the primary economic concerns with social security is its financing. Social security is funded through a combination of payroll taxes and government subsidies. Payroll taxes are collected from workers and their employers and are used to fund benefits for current retirees. However, as the population ages and more people retire the ratio of workers to retirees decreases, which puts pressure on the system’s financing. In addition, the government has to make up for any shortfalls in funding through general tax revenue.

Another economic issue with social security is the long-term sustainability of the program. With people living longer and healthcare costs rising, the cost of providing benefits is increasing. To maintain the program’s solvency, there have been discussions about raising the retirement age, reducing benefits, and increasing payroll taxes. However, these solutions are often politically unpopular and difficult to implement.

Social security also has a significant impact on the broader economy. For example, social security payments provide a stable source of income for retirees, which can help support consumer spending. In addition, the program can act as an automatic stabilizer during economic downturns by increasing benefits to those unemployed or underemployed. However, some critics argue that social security reduces the incentives for individuals to save for retirement, which can reduce overall savings and investment in the economy.

Finally, social security has important implications for income inequality. The program is designed to provide a safety net for those who cannot work or have low incomes, which can help reduce poverty among seniors. However, the benefits are not means-tested, which means that higher-income individuals also receive payments. This has led some to argue that social security should be reformed to provide more targeted assistance to those who need it most.

In conclusion, the economics of social security are complex and multifaceted. While the program provides a vital safety net for millions of Americans, its long-term sustainability and impact on the broader economy are important issues that policymakers must consider. As the population ages and economic conditions evolve, social security will likely continue to be a subject of intense debate and scrutiny.

1.Will a large quantity of bonds held in the Social Security Trust Fund make it easier to deal with the retirement of the baby boomers?

Yes, but only if the federal government holds these bonds until they mature

Yes; the interest on these bonds will provide the federal government with a stream of net revenue in the future

No; the federal government cannot redeem the bonds without raising revenues for their redemption from other sources

Yes; the federal government will be able to redeem these bonds in the future without raising taxes or increasing its borrowing

2.Identify the correct statement about the U.S. Social Security system.

It does not provide any benefits to Hispanic males

Low-wage workers get more benefits from the Social Security system than high-wage workers because they receive high tax exemptions

Low-wage workers get fewer benefits from the Social Security system than high-wage workers because they begin full-time work when they are younger

It provides more benefits to African American females than Hispanic females

3.Identify the correct statement about the U.S. Social Security system.

It provides more benefits to African American families than to Hispanic families

It provides low-income workers with benefits equal to 50 percent of those high-income workers receive

It provides more benefits to single women in the workforce without college degrees than to married women with college degrees

It provides the nonworking spouse with benefits equal to 50 percent of those the working spouse receives

4.The structure of the Social Security system is particularly advantageous to

groups with below average earnings and above average life expectancy

those with life shortening diseases such as diabetes

groups with above average earnings and below average life expectancy

blacks

5.Which of the following is true of personal retirement accounts (PRAs)?

They are a pay as you go system

They discourage investment and saving by imposing high marginal tax rates on workers

They are owned and operated by the government of an economy

They provide workers with a property right to the funds contributed into their accounts

6.The tax revenues in the United States increased rapidly during 1990–2010 because:

the U.S. government increased public borrowing by issuing bonds during this time

the proportion of the population that moved into the retirement phase increased during this time

the Federal Reserve increased the marginal tax rates after World War II

the large baby-boom generation born following World War II was working during this time

7.Which of the following is likely to lead to a rapid increase in the population of senior citizens in the United States during 2020–2035?

The retirement of the large baby-boom generation born after World War II

A decline in the infant mortality rates after World War II

A decline in the average life expectancy of U.S. citizens

The deterioration of the U.S. healthcare system after World War II

8.The unfunded liabilities of the Social Security and Medicare programs can be reduced only by:

decreasing the size of the Social Security trust fund

increasing the current tax rates

decreasing the current tax rates

increasing the size of the Social Security trust fund

9.The 1984–2009 surpluses of U.S. Social Security receipts relative to expenditures were used to purchase:

U.S. Treasury bills

certificates of deposit issued by the U.S. government

nonmarketable bonds

stocks in U.S. companies

10.The deficit between payroll tax revenues and the expenditures on benefits to retirees is expected to increase in the United States after 2020 because:

the number of beneficiaries relative to workers will increase rapidly in the decades ahead

the Social Security outlays will decrease rapidly after 2020

the number of unemployed workers will increase rapidly in the decades ahead

the Social Security Trust Fund bonds will decrease rapidly after 2020

11.Which of the following is true of personal retirement accounts (PRAs)?

They increase the dependency of senior citizens on political officials

They encourage saving and investment, which help promote economic growth

They fail to provide workers with a property right to the funds

The funds paid into PRAs cannot be passed along to heirs

12.The payments to Social Security recipients increased at a modest rate in the United States during 1990–2010 because:

the high mortality rate following World War II reduced the adult population in the United States

the proportion of people employed after World War II was small

the deterioration of healthcare programs following World War II reduced the life expectancy of people in the United States

the proportion of the population that moved into the retirement phase was small

13.The unfunded liabilities of the Social Security and Medicare programs:

reduce with a decrease in current tax rates

increase if the size of the Social Security trust fund increases

measure the difference between promised future benefits and the revenues that can be expected at current tax rates

measure the difference between the cost of providing Social Security and the revenues that can be expected at current tax rates

14.Identify the correct statement about the future of the Social Security system in the United States.

It is expected to run deficits

It is expected to run surpluses

The funds flowing into the system are expected to increase as a percent of payroll

The expenditures on benefits to retirees are expected to decrease

15.Under the current Social Security system, married persons may draw benefits based on

their own earnings plus 50 percent of their spouse’s earnings

their own earnings or draw 50 percent of the benefits earned by their spouse

their own earnings plus 100 percent of their spouse’s earnings

their own earnings plus 75 percent of their spouse’s earnings

16.Which of the following about Social Security is true?

The life expectancy of Hispanics at age 20 is generally lower than the figures for whites and blacks

Groups with an below average life expectancy gain from Social Security because they will typically draw retirement benefits over a more lengthy period of time

Hispanics derive a higher return from their Social Security taxes than whites, and substantially higher than blacks

The regressive nature of the Social Security benefit formula works to the advantage of groups with below average earnings

17.Identify the correct statement regarding the Social Security system.

The expected real returns on the Social Security tax payments are higher for single African American males than for single white males

The expected real returns on the Social Security tax payments are higher for single white females than for single Hispanic females

It works to the advantage of individuals with life-shortening diseases

The benefits cannot be passed on to heirs

18.Which of the following is likely to help cover the future deficits of the Social Security system?

An increase in borrowing from the public

An increase in government spending

An increase in the number of the Social Security Trust Fund bonds

A decrease in marginal tax rates

19.The payroll tax revenues flowing into the U.S. Social Security system were less than the benefits paid out to retirees in 2020. This deficit is expected to grow larger in the decades ahead. The future shortfall can be decreased by:

decreasing government spending in some areas

decreasing marginal tax rates

decreasing the amount borrowed by the government from the public

increasing the benefits paid out to the retirees

20.The Social Security system imposes a heavy penalty on:

Hispanic male workers in the workforce relative to African Americans

married women in the U.S. workforce

families headed by single females

families headed by retirees

The Economics of social security

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